Stock Options To The Rescue! Hewlett-Packard (HPQ)

| May 24, 2012 | 0 Comments

HPQ OptionsToday we’re going to look at a stock replacement strategy on Hewlett-Packard.  It allows you to reduce your risk and gives you upside potential.

Here’s what happened…

Hewlett-Packard (HPQ) shares opened up more than 7% today after reporting earnings after the market closed yesterday.  In their latest quarter, HPQ beat analysts’ earnings estimates.  And they announced plans to restructure the company and increased full year earnings guidance.

Here’s the deal…

The tech giant reported quarterly earnings of $0.98 per share.  Earnings we’re more than 7% better than the $0.91 analysts were expecting.  And revenue fell 3% from last year to $30.7 billion.

However, HPQ’s restructuring plans stole the show.  The company expects to save them $3.0 to $3.5 billion per year by firing 27,000 employees.

HPQ’s CEO, Meg Whitman, believes the changes they are implementing today will return the company to the path of long term growth.

Here’s the kicker…

On Tuesday, fellow PC maker, Dell (DELL), reported a disastrous quarter.  Dell’s horrible quarter pulled down HPQ’s stock ahead of their quarterly earnings report on Wednesday.

Investors who bought HPQ as it sold off due to Dell’s earnings were handsomely rewarded today.  The stock popped more than 7%. Unfortunately, HPQ has begun to give back some of those gains throughout the trading day.

Obviously, if you bought HPQ ahead of earnings, you were expecting some positive news from them.  And we got it.  HPQ is entering into a massive restructuring.

But there’s still a lot of uncertainty around the success of their restructuring plan.

Instead of hanging onto the stock, take a look at replacing your stock holdings with a call option.

Here’s what to do now…

Let’s assume you bought 100 shares of HPQ at $21 before earnings.  It’s currently trading at $21.65.  So, you’re sitting on a small 3% gain.

Selling HPQ and buying the HPQ November $24 call option for $1.15 will reduce your risk and give you upside potential if HPQ’s restructuring fuels a rally over the next few months.

The November option gives us almost two full quarterly earnings cycles for investors to evaluate how Meg Whitman’s plan is taking shape.

If investors buy into HPQ’s plan, the stock could easily hit $30 by the time our options expire.  However, investors will likely cut and run if the restructuring doesn’t get off to a good start in the next few months.

Don’t forget, HPQ has fallen 60% from its 2010 high of $55.  And it hasn’t shown any signs of pulling out of its freefall.  If there’s even a hint that the restructuring won’t fuel the promised increase in profitability, the stock could easily plummet to around $15 or even lower.

If you hold onto the stock, your $2,100 investment it could be worth $3,000.  Or it could be worth $1,500 or less.  In other words, you’re taking on $600 of risk in order to make $900.  And that’s just too much risk in my book.

The call option costs you $115.  If HPQ’s restructuring flops, that’s the maximum you can lose.  However, if HPQ soars to $30, the option will be worth $600.  That’s potential profits of $485 with only $115 worth of risk.  Now that’s a risk/reward profile I can live with.

As you can see, replacing your HPQ stock holdings with a call option will help you reduce your risk and still give you the upside potential you’re looking for.

Good Investing,

Corey Williams

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Category: Stock Options To The Rescue!

About the Author ()

A former banking executive, Corey Williams is the Chief Options Strategist and co-editor of our well-known daily newsletter, Options Trading Research. Corey’s extensive experience with options goes all the way back to his days in corporate finance. It was this decade in banking where Corey discovered the most important skill an options trader can have– the ability to analyze a company or sector to determine its likely future direction. And now he’s brought this background, experience and love of options to Options Trading Research, the unique daily e-letter devoted exclusively to helping individual investors profit from the very lucrative options market.